IDEAS home Printed from https://ideas.repec.org/a/eee/matsoc/v124y2023icp24-34.html
   My bibliography  Save this article

Targeted advertising with R&D rivalry

Author

Listed:
  • Li, Changying
  • Li, Youping
  • Zhang, Jianhu

Abstract

We analyze the effect of targeted informative advertising on firms’ incentive to improve product quality and the welfare implications. We find that, compared with mass advertising, targeted advertising results in (i) a decreased incentive to invest in R&D unless the cost of advertising is sufficiently low, (ii) a lower mark-up, net of product quality, being charged to consumers, and (iii) a smaller (larger) proportion of uninformed consumers when the cost of advertising is low (high). The firms may earn higher or lower profits, but consumers are usually better off due both to the lower net mark-up and to improved product-consumer match. Under certain conditions though, the negative impact of more uninformed consumers dominates and leads to reduced consumer and total welfare.

Suggested Citation

  • Li, Changying & Li, Youping & Zhang, Jianhu, 2023. "Targeted advertising with R&D rivalry," Mathematical Social Sciences, Elsevier, vol. 124(C), pages 24-34.
    • Handle: RePEc:eee:matsoc:v:124:y:2023:i:c:p:24-34
    DOI: 10.1016/j.mathsocsci.2023.04.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165489623000380
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.mathsocsci.2023.04.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-1137, December.
    2. Rodrigo Montes & Wilfried Sand-Zantman & Tommaso Valletti, 2019. "The Value of Personal Information in Online Markets with Endogenous Privacy," Management Science, INFORMS, vol. 65(3), pages 1342-1362, March.
    3. Leahy, Dermot & Neary, J Peter, 1997. "Public Policy towards R&D in Oligopolistic Industries," American Economic Review, American Economic Association, vol. 87(4), pages 642-662, September.
    4. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 63-81.
    5. Rosa-Branca Esteves & Joana Resende, 2016. "Competitive Targeted Advertising with Price Discrimination," Marketing Science, INFORMS, vol. 35(4), pages 576-587, July.
    6. Galeotti, Andrea & Moraga-González, José Luis, 2008. "Segmentation, advertising and prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1106-1119, September.
    7. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
    8. Lola Esteban & José M. Hernández & José Luis Moraga‐González, 2006. "Customer Directed Advertising and Product Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 943-968, December.
    9. Ganesh Iyer & David Soberman & J. Miguel Villas-Boas, 2005. "The Targeting of Advertising," Marketing Science, INFORMS, vol. 24(3), pages 461-476, May.
    10. Kevin W. Chauvin & Mark Hirschey, 1993. "Advertising, R&D Expenditures and the Market Value of the Firm," Financial Management, Financial Management Association, vol. 22(4), Winter.
    11. Lola Esteban & Agustín Gil & Jose M. Hernández, 2001. "Informative Advertising and Optimal Targeting in a Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 161-180, June.
    12. Michael Arnold & Eric Schmidbauer & Lan Zhang, 2022. "Uniform and targeted informative advertising with asymmetric customer loyalty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 90-114, February.
    13. Nada Ben Elhadj-Ben Brahim & Rim Lahmandi-Ayed & Didier Laussel, 2014. "Is Targeted Advertising always Beneficial?," World Scientific Book Chapters, in: Kaddour Hadri & William Mikhail (ed.), Econometric Methods and Their Applications in Finance, Macro and Related Fields, chapter 20, pages 551-585, World Scientific Publishing Co. Pte. Ltd..
    14. Shota Ichihashi, 2020. "Online Privacy and Information Disclosure by Consumers," American Economic Review, American Economic Association, vol. 110(2), pages 569-595, February.
    15. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    16. Justin P. Johnson, 2013. "Targeted advertising and advertising avoidance," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 128-144, March.
    17. Ramon Casadesus-Masanell & Andres Hervas-Drane, 2015. "Competing with Privacy," Management Science, INFORMS, vol. 61(1), pages 229-246, January.
    18. Gary Erickson & Robert Jacobson, 1992. "Gaining Comparative Advantage Through Discretionary Expenditures: The Returns to R&D and Advertising," Management Science, INFORMS, vol. 38(9), pages 1264-1279, September.
    19. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-1306, December.
    20. Esteves, Rosa-Branca & Resende, Joana, 2019. "Personalized pricing and advertising: Who are the winners?," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 239-282.
    21. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-121, January.
    22. Dirk Bergemann & Alessandro Bonatti, 2011. "Targeting in advertising markets: implications for offline versus online media," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 417-443, September.
    23. Esteban, Lola & Gil, Agustin & Hernandez, Jose M, 2001. "Informative Advertising and Optimal Targeting in a Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 161-180, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Siemering, Christian, 2023. "A model of endogenous targeting in duopoly," Information Economics and Policy, Elsevier, vol. 64(C).
    2. Zhang, Jianqiang & He, Xiuli, 2019. "Targeted advertising by asymmetric firms," Omega, Elsevier, vol. 89(C), pages 136-150.
    3. Zhao Jiang & Wu Dan & Liu Jie, 2020. "Distinct role of targeting precision of Internet-based targeted advertising in duopolistic e-business firms’ heterogeneous consumers market," Electronic Commerce Research, Springer, vol. 20(2), pages 453-474, June.
    4. Flavio Pino, 2022. "The microeconomics of data – a survey," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(3), pages 635-665, September.
    5. Esteban, Lola & Hernández, José M., 2017. "Direct advertising and opt-in provisions: Policy and market implications," Information Economics and Policy, Elsevier, vol. 39(C), pages 15-25.
    6. Lola Esteban & José Hernández, 2011. "Specialized advertising and price competition in vertically differentiated markets," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 2(2), pages 255-282, June.
    7. Esteves, Rosa-Branca & Resende, Joana, 2019. "Personalized pricing and advertising: Who are the winners?," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 239-282.
    8. Lola Esteban & José Hernández, 2014. "Endogenous direct advertising and price competition," Journal of Economics, Springer, vol. 112(3), pages 225-251, July.
    9. Lola Esteban & José M. Hernández, 2016. "Advertising Media Planning, Optimal Pricing, and Welfare," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 880-910, December.
    10. Xiuxian Li & Pengwen Hou & Shuhua Zhang, 2023. "The optimal advertising strategy with differentiated targeted effect consumers," Annals of Operations Research, Springer, vol. 324(1), pages 1295-1336, May.
    11. Andreas Hefti & Shuo Liu, 2020. "Targeted information and limited attention," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 402-420, June.
    12. Rosa-Branca Esteves & Joana Resende, 2016. "Competitive Targeted Advertising with Price Discrimination," Marketing Science, INFORMS, vol. 35(4), pages 576-587, July.
    13. Simon Anderson & Alicia Baik & Nathan Larson, 2023. "Price Discrimination in the Information Age: Prices, Poaching, and Privacy with Personalized Targeted Discounts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(5), pages 2085-2115.
    14. Lola Esteban & José M. Hernández, 2017. "Perfect versus imperfect direct advertising, and market performance," Journal of Economics, Springer, vol. 122(1), pages 1-27, September.
    15. Lola Esteban & Jose M. Hernandez, 2007. "Strategic Targeted Advertising and Market Fragmentation," Economics Bulletin, AccessEcon, vol. 12(10), pages 1-12.
    16. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    17. Li, Sanxi & Sun, Hailin & Yu, Jun, 2023. "Competitive targeted online advertising," International Journal of Industrial Organization, Elsevier, vol. 87(C).
    18. Rosa Brana Esteves & Joana Resende, 2017. "Personalized Pricing with Targeted Advertising: Who are the Winners?," NIPE Working Papers 02/2017, NIPE - Universidade do Minho.
    19. Galeotti, Andrea & Moraga-González, José Luis, 2008. "Segmentation, advertising and prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1106-1119, September.
    20. Lola Esteban & José Hernández, 2012. "Specialized advertising media and product market competition," Journal of Economics, Springer, vol. 106(1), pages 45-74, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:matsoc:v:124:y:2023:i:c:p:24-34. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505565 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.